This is the first in a series of articles based on more in-depth research by JLT EB into ‘under-saving’ in the UK and how the workplace can help address this.
Over the coming weeks, we will consider the extent of this ‘under-saving challenge’ and the role different stakeholders can play in overcoming it.. Recognising that there is no ‘one size fits all’ solution, we will explore the importance of segmenting employees in order to encourage the right behaviours amongst individuals with different needs, wants and desires.
With the UK increasingly becoming a nation of ‘DC dependents’ (individuals who have only ever been in pension schemes where they bear all the risks – and, in particular, the risk of not having enough money to retire), our series of articles will conclude with the JLT EB ‘DC manifesto’. The manifesto is our vision for improving inputs, outputs and outcomes from workplace DC pension schemes, regardless of the form they take.
We begin, however, by looking at the scale of the under-saving challenge and the implications if it is not addressed.
FISCAL AND ECONOMIC CONSEQUENCES
Automatic Enrolment (AE) has been a resounding success in terms of getting workers into pension schemes. More than nine million workers have been enrolled into workplace pensions, increasing coverage from 55 per cent of eligible workers to 78 per cent and with an opt-out rate of only nine per cent.
Intuitively, you might think this would also mean that people are saving more but you would be wrong. Most of those brought into workplace pensions as a result of AE have only low levels of contributions. As a result, despite rising levels of coverage, employee contribution rates are falling.
AE contributions are being phased in; they were increased this year and will increase again in 2019. But, according to the Pensions and Lifetime Savings Association the minimum contribution level, even after 2019, will not provide an adequate standard of living in retirement for more than 13 million of the 25.5 million people in employment.
Moreover, the underlying ‘problem’ is not just pension contribution levels. We are simply not saving enough across the board. Kamal Ahmed, the BBC Economic Editor, recently highlighted that, with the savings ratio at 4.1%, the third lowest since records began in 1963, “we are losing the saving habit”.
The upshot of all of this is that unless action is taken soon, the long-term fiscal and economic implications for the UK’s population could be severe and leave a lost generation with nothing to look forward to but slim pickings from the benefit system and / or working until they drop.
It is also worth noting that, based on our research, the under-saving challenge problem will not be solved through ‘property’ or ‘inheritance’ and, with interest rates on the rise, is likely to be exacerbated by rising household debt, increased longevity and early departure from the labour market (the DWP found men left the labour market at an average age of 67 in 1950, compared with 65 now).
So what should be done?
THERE ARE SOLUTIONS
Given everything said so far, it would be very easy to get disheartened. However, while saving for retirement is now a considerably greater challenge, it does not have to be an insurmountable one.
Part of the solution is higher contributions, but this then begs a rather obvious question – ‘How much is enough?’.
There is no easy answer but, allowing for the flexibility afforded by the pension freedoms that were introduced in 2015, government recommended income replacement rates (e.g. a pension of 2/3rds of pre-retirement income for a median earner) are achievable.
In fact, our Getting to know you paper shows that with contributions based on full earnings, a total contribution rate of approximately 10 per cent could be expected to achieve a two-thirds income replacement over a full working life.
Replacement rates are, however, not a panacea and, simply increasing pension contribution rates is not the answer for everyone.
The heading to this section is ‘There are solutions’ and there are but equally there is no ‘one size fits all’ option.
In future articles, we will explain why, in order to address the under-saving challenge, employers need to first understand their workforce demographics. We will also demonstrate why saving in the workplace can be so effective.
Before that, just in case any readers are wondering, let’s conclude by answering one more question.
WHY SHOULD EMPLOYERS CARE?
Apart from the fact that in our experience employers do care about the financial wellbeing of those that work for them, there are at least four compelling reasons for employers to look beyond their basic legal duties.
- Employers need a strategy for managing workers that retire, or partially retire, on their watch. Failure to do so could result in rising discontent with some workers remaining in employment for the wrong reasons. This will have a significant negative impact upon businesses.
- In other countries, employers have faced legal action by not doing the right thing by their employees. It is quite conceivable that the UK political and legal environment could change in way that means today’s employers should have met higher standards than current minimum requirements would seem to suggest.
- Poor financial wellbeing affects behaviour and performance.
- If employees cannot afford to retire, this may create difficult employment situations as competency based processes for an ageing workforce may be needed, if, as happens to most, we begin to slow down as we age.
For more information on the issues raised in this article and how they may be impacting your people and business, contact John Wilson, Head of Technical at email@example.com.